Consumer Spending Weakens as Stimulus Fades

WASHINGTON (AP) -- Consumer spending in August turned in the weakest performance in six months, underscoring the threat the economy faces as the government's stimulus program fades into the past.

The Commerce Department reported Monday that consumer spending was unchanged in August, even worse than the small 0.2 percent gain economists had expected. It was the weakest showing since spending was also flat in February.

Personal incomes were up a better-than-expected 0.5 percent, a rebound after a 0.6 percent drop in July. After-tax incomes, which felt the impact of the stimulus program to a greater extent, dropped by 0.9 percent, however.

"Consumers are still earning some money but they have no interest in spending it," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa.

The new report showing weakness in consumer spending came as the House prepared to vote on a $700 billion bailout of the financial system. The compromise packaged, hashed out in marathon meetings by lawmakers over the weekend, would be the largest financial system rescue since the Great Depression. It is aimed at buying up soured mortgage-related assets from banks in the hope that would pry open credit markets, get lending flowing again and jump-start the economy.

The government pumped out the bulk of $92 billion in stimulus payments from late April through mid-July. Another $1 billion in payments were made in August but this was far below the monthly peak of $48.1 billion in payments made in May.

Analysts are concerned the economy could falter now that the government's stimulus payments have ended. Democrats have pushed for a second stimulus program. The Bush administration, worried about the impact of the stimulus on the budget deficit, has resisted that effort.

The overall economy grew at an annual rate of 2.8 percent in the April-June quarter, bolstered by the stimulus payments.

But economists noted that consumer spending, which accounts for two-thirds of total economic activity, has slowed markedly in the current July-September quarter. Some analysts believe consumer spending will decline for the entire quarter, the first time that has occurred since 1991.

Many analysts believe the overall economy, as measured by the gross domestic product, will slow significantly in the current quarter. Some say the weaker-than-expected performance for consumer spending in August could mean that the overall economy will show no growth at all in the July-September quarter and then turn negative in the final three months of this year and the first quarter of 2009, meeting the common definition of a recession.

Brian Bethune, chief U.S. financial economist at Global Insight, said the Federal Reserve will need to consider cutting interest rates because of "a recession reality that needs to be confronted with a more aggressive policy response."

There is a growing expectation that the Federal Reserve will cut interest rates at its next meeting on Oct. 28-29, in an effort to prop up the economy as spending sags.

In addition to the winding down of the stimulus program, consumers have been hurt by the huge upheavals that are occurring as Wall Street undergoes its biggest restructuring since the 1930s. In the latest move, Citigroup Inc. announced Monday it was acquiring the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.

The report on personal spending and incomes showed that a price gauge tied to consumer spending was unchanged in August while prices, excluding energy and food, rose by 0.2 percent. Excluding energy and food, core prices are up by 2.6 percent over the past year, the biggest increase since a similar 2.6 percent rise in the 12 months ending in January 1995.

Many economists believe that the Fed will discount this jump in inflation when they meet at the end of October to debate their next move on interest rates, given that most signs indicate that inflation pressures are peaking and starting to abate.

However, some analysts are worried that the $700 billion bailout package, which will increase the government's budget deficits, will add to inflation pressures over the next year.

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